Blackstone Inc

NYSE:BX

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Blackstone First Quarter 2018 Investor Call. My name is Derek, and I'll be your operator for today. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Weston Tucker, Head of Investor Relations. Please proceed.

[Weston Tucker]

Great. Thanks, Derek, and good morning, and welcome to Blackstone's First Quarter Conference Call. Joining today's call are Steve Schwarzman, Chairman and CEO; Jon Gray, President and Chief Operating Officer; Tony James, Executive Vice Chairman; Michael Chae, Chief Financial Officer; and Joan Solotar, Head of Private Wealth Solutions and External Relations.

Earlier this morning, we issued a press release and slide presentation, which are available on the shareholders page of our website. We expect to file our 10-Q report early next month. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the firm's control and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the risk factor section of our 10-K. We will also refer to non-GAAP measures on this call and you'll find reconciliations in the press release. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund.

This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. So a quick recap of our results. We reported GAAP net income of $842 million for the first quarter of 2018. Economic net income or ENI per share was $0.65, which is down from a strong - very strong first quarter 2017 as higher fee-related earnings were offset by lower performance and other revenue. Distributable earnings per common share were $0.41 for the first quarter and we declared a distribution of $0.35 to be paid to holders of record as of April 30. And with that, I'll turn the call over to Steve.

[Stephen Schwarzman, Founder, Chairman & CEO]

Thanks, Weston, and good morning, and thank you for joining our call. Blackstone reported a strong start to the year, highlighted by significant outperformance across our fund as compared to global markets, which you may have heard when Jon spoke, continued substantial capital inflows into all of our businesses and a very active investment base. Total assets under management rose to a new record of $450 billion, up 22% year-over-year. And every one of our business segments, private equity, real estate, credit and Hedge Fund Solutions grew AUM to new record levels. Against a backdrop of declining global markets and a sharp spike in volatility, the value proposition that Blackstone offers becomes even more compelling. In a world where most investors have become accustomed to everything going up, one of the great attributes of the alternatives business is that it can delink outcomes and protect investor's capital when negative things happen in public markets like they have. Blackstone's consistently strong performance across all asset classes and market cycles is a critical differentiating factor for us versus other asset managers.

This consistency and stability deepens our relationships with our Limited Partners and results in them wanting to do more business with us. The delinking of our performance by market indices was well evidenced in our first quarter results. Our private equity and real estate strategies appreciated between 3% and 7% in the quarter, well ahead of the negative 1% return to the S&P and the negative 8% return for the REIT index. Our credit strategies outperformed the high-yield index, while our Hedge Fund Solutions business delivered a gross composite return of positive 1.3% in the quarter with less than 1/4 volatility of the market when the S&P, as I said, went down 1%. What's been happening in markets would suggest this is a good time to invest in low volatility strategies with high returns instead of an index. Not surprisingly, net inflows at BAAM, our Hedge Fund Solutions business is up $2.8 billion, was the best in over three years.

Blackstone's outperformance starts with being able to choose our spots, in terms of sectors and regions and then engaging in significant operational improvements whenever buying the market. And with mostly locked up capital and long-term funds, we have enormous flexibility, both in terms of investing our dry powder as well as timing our exits. We have the luxury of not having to worry about meeting near-term earnings targets or facing short-term redemptions. The focus always is on maximizing value, which is what we've shown we can do over 32 years. Our Limited Partners appreciate our model and help in drive out-performance with less risk. This is why global allocations to alternatives continue to rise with Blackstone taking share. Our total capital inflows exceeded $18 billion in the first quarter, which Michael Chae will discuss in more detail. Since the start of 2015, our LPs have entrusted us with remarkable $289 billion of capital. It's almost $300 billion of capital, which is greater than the total AUM of any of our peers, and that's in only three years. Over that same time frame, we returned to our LPs, $143 billion through realizations.

We continue to expand our global platforms into new adjacencies as well as create altogether new business lines. In real estate, our core+ platform has grown to nearly $30 billion in 4.5 years, including three permitting capital vehicles with the fourth coming later this year. As I've said before, I believe this business will ultimately reach $100 billion and we're on our way to doing it. In terms of new businesses, our infrastructure initiative is progressing well. We finalized documentation with our largest investor late last fall and had our team largely in place early this year, which is already reviewing a pipeline of interesting investment opportunities. We expect to have our first close in the second quarter, followed by a series of additional closures over the next year. I can't comment further on specific numbers given we're in the middle of fundraising. But investor response has been positive so far with broad interest from pension funds, sovereign wealth funds and others, both domestically and outside the U.S. Apart from infrastructure, we're continuing to build-out our dedicated insurance initiative with some high-quality additions to our team.

And our efforts in the retail private wealth channel continue to ramp with several new products and additional distributor relationships. We're in the early innings of our build-out in these vast under-penetrated markets, and I believe our AUM in these areas will ultimately be multiples of what it is today. Our portfolio companies are performing well against the strong economic backdrop with positive growth virtually everywhere, and that is largely expected to continue for the foreseeable future. Despite the strong fundamentals, however, stock markets have become unsettled recently. This is partly due to increasing worries over global trade, including the relationship between United States and China as well as with NAFTA. I visited China twice in the last few weeks and have met with the senior leaders involved with their economy. President Xi's speech last week at the Boao Forum, where I was, was an extremely important one, in which, he indicated China is prepared to seriously discuss the start of opening its markets and making other significant changes in its economy. President Trump's positive response to President Xi's speech was also reported, to what I think, should be a very productive future dialogue between the two countries with the prospect for a significant change in the trade area.

On NAFTA, talks are taking longer than might have been expected. But I believe it's in all three countries overwhelming interest to proceed with the revised deal, which I expect will happen over the next several weeks. To the extent the current volatility in the market continues, Blackstone is well positioned to take advantage of any opportunities that might arise with $93 billion of dry powder capital, the industry's largest. I'll close my remarks today with some comments on our people and our recent succession announcements. At Blackstone, our most important asset is our people. Our professionals are truly remarkable and I feel privileged to work with them. Each of our businesses is led by someone extraordinary, with other highly talented professionals around them. When somebody moves up, there's a deep bench of talent to support the transition and replace them. Because we typically plan succession many years in advance it is both seamless and organic. And when we launch new businesses, we create additional leadership opportunities for our people. That's part of what makes it fun to work here. The result is a highly successful formula for career development and a way to perpetuate the unique integration that exists across the firm even as we continue to grow. Sitting next to me today who you can't see, but you will sure hear from him is Jon Gray, who succeeds Tony James, who is sitting next to Jon as the firm's President and Chief Operating Officer.

Jon is an exceptional individual and the true culture carrier of the firm. I've known him his entire career, having hired him from Wharton in 1992. So he's been at the firm for six years. He is a gifted investor and leader, and like many others at Blackstone, a homegrown talent. I could not have more confidence in Jon's ability to continue driving the firm forward. Tony, I'm happy to report, isn't going anywhere. He has assumed the role of Executive Vice Chairman and will remain on the firm's investment committees, management committee and Board of Directors. Among other responsibilities, he will continue to focus on strategic growth initiatives, of which, we have many. Tony has had a profound impact on Blackstone since joining the firm over 15 years ago in 2001. He is the chief architect of many of our successful new businesses and also drove the institutionalization of our investment processes and the ongoing development of our people. We've all benefited enormously from Tony's talent and vision and will continue to do so. Across the firm, other promotions have occurred with highly talented individuals moving into key leadership positions, including in real estate, our hedge fund area and our credit business.

These changes lay the foundation for the next several decades of senior leadership of the firm and support the seamless continuity of our culture. And it is our distinctive culture built over 30 years and instilled in every one of the firm that ties us together into a larger company. Blackstone isn't a job per se, it's a mission to be the very best in the world at what we do. To work at our firm, you have to believe this. You have to love what you do and constantly strive to do it better. Our investors count on the consistent output of that culture, characterized by excellence, meritocracy and the highest standards of integrity. No one knew that better than my long-time business partner and co-founder of Blackstone Pete Peterson. Last month, we were all saddened to learn of his passing at the age of 91. Pete's death is a great loss for all of us who knew him, including all of us here at Blackstone. Pete and I built this firm together from the ground up, we had nothing, but $400,000 in startup capital and no clients and no LPs. And it has prospered over the subsequent three decades, more than either of us could ever imagine. Pete's wisdom and judgment were unmatched and he was an inspiration to all around him. Pete left a truly lasting mark on Blackstone and on the world and will truly be missed. Thank you for joining our call today. I'll now turn things over to our Chief Financial Officer, Michael Chae, another one of our terrific homegrown leaders. Michael, you are on.

[Michael Chae, CFO & Senior MD]

Thanks Steve, and good morning, everyone. The firm's strong momentum continued in first quarter, highlighted by continued robust inflows, investment out-performance across the firm and a steadily building store of value. Total revenue for the quarter was $1.7 billion, while economic net income totaled $792 million or $0.65 per share. Although, down from last year's first quarter, which is one of our best quarters ever, these numbers reflect a particularly strong result against challenging market backdrop. Attractive fund returns across a steadily growing base of invested capital drove healthy performance and principal investment revenues of $953 million. Management fee revenue rose 13% year-over-year to $736 million, our highest quarter ever, while fee-related earnings increased 14% to $333 million. For the prior 12 months, FRE was up 20% to $1.3 billion or $1.07 per share. That's likely double our annual FRE production six years ago, period through which our fee earning AUM has grown meaningfully and our margins have expanded sharply.

Distributable earnings were $502 million in the first quarter or $0.41 per share, down from the prior year as we sold less in the context of volatile markets. Away from realizations, however, our other capital metrics: investment performance, deployment and fundraising all continue to demonstrate powerful momentum. Starting with investment performance. Our flagship funds and strategies all outperformed the comparable indices in the first quarter in many cases by a wide margin. The corporate private equity funds appreciated 6.4% in the quarter, while Tac Opps appreciated 5.2% and Strategic Partners 6.9%, all comparing favorably to the 1% decline in the S&P. In real estate, the opportunity funds appreciated 3.5%, core+ 3.4%, BREDS drawdown 4.4% and BREP 3%, all well ahead of the public REIT index, which declined 8% as Steve mentioned. Our performance is driven by multiple factors.

As Steve mentioned, to being with choosing the right sectors on a regional basis, using our size as an advantage to move scale capital towards those ideas often across multiple funds and then creating lasting value in our investments through transformative asset management. And against the backdrop of a generally healthy external operating environment, the results from these portfolios that are performing well and expanding in value. In private equity, our portfolio has seen broad-based strength with EBITDA growth accelerating further in the quarter to the low double digits on a percentage basis. In terms of sectors, we are seeing particular strength in our technology portfolio and in the global industrials area. In the latter area, a significant driver of the 6.4% corporate PE appreciation in the quarter was our investment Gates, the largest investment in BCP VI, which we took public in the quarter, resulting in a substantial uplift from a valuation standpoint. In real estate, our largest current investments are in secular growth tailwinds, including global logistics, life sciences, U.S. and Spanish housing and Indian office. Conversely, our real estate funds have less than 5% exposure to U.S. retail real estate. The public REIT index in contrast has a 20% retail weighting. In BAAM, our composite outperformed the S&P by about 200 basis points with a quarter of the volatility.

During February and March, at a time where the S&P was down 6%, our returns were flat. This kind of performance protecting capital during periods of significant market downturn and volatility is an essence proof-of-concept for our hedge fund solutions business. Strong fund performance across the firm generated $537 million of net performance revenues in the quarter, lifting the net performance revenue receivable on the balance sheet to $3.6 billion, the highest level in nearly three years. And despite $45 billion of realizations over the past 12 months, generating over $1.8 billion of net realized performance revenue, the firm's performance revenue receivable still grew 9% year-over-year, all of this bodes well for future realizations. Moving to deployment. We invested $10 billion in the quarter, our fifth highest quarter ever, driving invested performance revenue eligible AUM to nearly $200 billion. We continue to leverage our global scale and diversity of platforms to find value around the world.

A majority of our capital deployed in the quarter was outside of the U.S. In general, we're still finding attractive relative value in Europe, and our largest investments in both private equity and real estate in the quarter were in that region. The firm single large investment in the quarter was the acquisition of a 51% interest in €27 billion face value real estate portfolio from Spanish bank, Santander. This was a landmark transaction, drawing on capital from across the firm up and down the capital structure. This transaction is an excellent illustration of the firm's ability to identify an area, in which, we have high conviction and capabilities on the ground, in this case, Spanish housing, and deliver a complete solution in scale. In private equity, we closed on our take private of U.K. listed payments company, Paysafe, and already announced last week, a nearly $1 billion synergistic add-on acquisition to the business. We committed to another $5 billion investments in the quarter, including the Thomson Reuters transaction and the privatization of a Canadian industrial REIT, which we expect to close in the coming quarters. Overall, we believe a more volatile world ultimately leads to deployment opportunities and the potential for excess value creation over the longer-term. Moving to fundraising. Gross inflows were $18 billion in the first quarter, reflecting an increasingly diverse number of initiatives across the firm. In terms of highlights, we had closed this in the quarter for drawdown strategies in five different businesses.

For the third flagship credit distressed fund, which recently hit its hard cap at $7 billion; the second Asia real estate fund, which we expect will shortly hit its hard cap at $7 billion, our first Asia private equity fund, which is also nearing its revised hard cap of $2.25 billion, our third Tactical Opportunities Vintage and our second real assets secondary fund. Or core+ real estate platform has grown its AUM 87% year-over-year to nearly $30 billion. BAAM is experiencing good momentum with its second quarter in a row of nearly $4 billion in gross inflows and its best net inflow quarter since 2014, as Steve mentioned. We continued with our build out in high-growth retail insurance areas; although, still early stage, we added another $1.5 billion in insurance, bringing our dedicated BIS platform to $24 billion. And in retail, we raised $3.4 billion with most of this coming from our products that we've developed and customized for the channel, including our daily liquidity hedge fund in BAAM, our new credit interval fund in GSO; and BREIT, which is revitalized and arguably reinvented the nontraded REIT market. For the prior 12 months, total gross inflows exceeded $112 billion, a firm record for any 12-month period. Combined with $32 billion of fund appreciation, total AUM rose 22% to $450 billion and fee-earning AUM grew 23% to $345 billion, both record levels. We are very optimistic about the fundraising outlook from here. I'll finish my remarks today with a comment on the launch of our new direct lending platform and on two capital actions we're announcing today.

With respect to our direct lending efforts, we concluded our sub-adviser relationship with Franklin Square earlier this month. We're excited about the prospects for this business under the Blackstone GSO brand with full ownership of economics. We're in advanced fundraising discussions with anchor institutional investors and plan to launch in the retail channel in the current quarter, sooner than originally expected. With the strength of GSO's investment platform and Blackstone's distribution capabilities in both the retail institutional channels, we're quite confident in our ability to rebuild one of the direct lending businesses in the world. The after-tax consideration received in connection with conclusion of the Franklin Square relationship will be used to support the special distribution to shareholders of $0.30 per unit or approximately $360 million in total to be paid alongside the second, third and fourth quarter regular distributions, $0.10 per unit in each quarter. Fundamentally, we are always evaluating all aspects of our capital strategy to optimize value, seed new funds, support new businesses and strategic initiatives and engage selectively in M&A.

Our announcement today of $1 billion share repurchase program is reflective of the firm's considerable financial strength, which has continued to advance over the past several years. We have amassed a cash and treasury investment balance of $4.5 billion, and at the same time, have put in place a conservative, low-cost, long-dated liability profile with a weighted average after-tax cost of debt capital of just over 3% and an average maturity of nearly 15 years today. We have zero net debt and remain A+ rated by both S&P and Fitch, among the highest ratings for any financial company. Our balance sheet and liquidity position afford us the flexibility and firepower to further expand our favorable distribution policy to include share repurchases. The catalyst to the program has been desired to offset dilution from issuance related to equity awards over the next several years. While we've carefully managed share creep over time to minimize dilution, we decided to take this a step further with today's announcement. We believe this $1 billion repurchase program, combined with the $360 million special distribution served to further enhance an already highly attractive value proposition for shareholders. Most of all, these actions reflect our deeply held belief in the value of our firm and our stock and our commitment to serving shareholder value over the long term. With that, we thank you for joining the call, and would like to open it up now for questions.

[Operator]

[Operator Instructions]. And our first question will come from the line of Craig Siegenthaler, Crédit Suisse.

[Craig Siegenthaler, Crédit Suisse AG]

I just wanted to come back to the buyback authorization. So number one, does this signal that we could see an increase in stock based comp above what we've been seeing in the last few years? And really question two is, if the stock gets attractive in your view, it gets cheaper, is there any potential to put a decline in the share count or is this really purely to offset dilution?

[Michael Chae, CFO & Senior MD]

Great. First, to your first question, you should not expect that these two are not related. You shouldn't expect that increase and our decision to authorize this buyback and to deliver basically a zero organic dilution policy is really in the spirit of taking our historical discipline around managing dilution and being even more aggressive around it.

[Craig Siegenthaler, Crédit Suisse AG]

Got it.

[Michael Chae, CFO & Senior MD]

As for your second question, look, I'd say in general, we've outlined the parameters around how we approach this. We will be opportunistic and we'll be flexible in our approach on this. And so I - that's how we're going to think about this.

[Operator]

Your next question will be from the line of Alex Blostein of Goldman Sachs.

[Alexander Blostein, Goldman Sachs Group]

I want to ask you about kind of the skill in the business that you are well on your way of increasing in variety of different products. I guess, taking a step back, it just seems like you guys have more growth initiatives today than you've had in a while, you're investing in a bunch of new businesses and yet the FRE margins have actually been quite stable, looks like 45-ish percent this quarter, so actually up a little bit year-over-year. I guess, how should we think about the pace in investing, the trajectory for FRE margins from here, and once some of these initiatives get to fully scale, kind of what you see as a more reasonable run rate couple of years from now?

[Michael Chae, CFO & Senior MD]

Look, I think, you correctly noted, Alex, that our FRE margins have really enjoyed a great trajectory over time. I think we're up about 500 basis points over the last couple of years. And we think over the long term, those margins, while we may not continue to increase at sort of that pace, we'll be stable to expanding over the long run, over the medium to long run. In a very short term, I should note, in the next couple of quarters, principally, because of the Franklin Square exit that will pose a bit of a headwind on FRE growth and perhaps margin, but I don't want to make too much of that, but that's worth noting. I'd say at the margin, the current spending on initiatives is also a marginal drag. And so that's reflected in the current FRE and will be reflected for - in the coming couple quarters. But the overall message is one of medium- to long-term stability around margin to expansion around margin. In terms of the kind of contribution of initiatives, it really varies. And one that we talked a lot about is the insurance area, and that's one where there will be multiple and/or there will be multiple different elements to that strategy and the types of insurance assets we'll manage under investment - under IMAs, a portion of which could be sub-advised to direct LP relationship insurance companies. So they are all varieties of that. I'd say overall, a significant portion of those assets over time, not only do we think they could scale, but the long run, I underscore long-run, marginal contribution characteristics of those dollars are very attractive.

[Stephen Schwarzman, Founder, Chairman & CEO]

Let me just jump in. Our goal was invest in the future. So in our FRE for some period of time there have been a lot of different investments to the future. I think this one of the things that we're proud of that we constantly do that. So this is - there is investment in the future, but it is not different from the past in that way. The other thing is, our permanent capital vehicles, which will account for more and more of the business and are accounted for more and more of the business have very attractive - once they get to the scale, very attractive FRE margins. So as they scale, so you'll see that having more and more impact on our margins.

[Operator]

Your next mission will come from the line of Bill Katz, Citigroup.

[William Katz, Citigroup]

Maybe for Jon, since first time in this format. A two-part question. So you've been with the firm for a long time as Steve highlighted, and I think, the firm itself has highlighted a fair amount of opportunity over the next several years. How should we think about, from your perspective, where else you might see some growth? And then maybe a bit more tactically, I wonder one of the prospects again to stock is rates up bad for Blackstone's real estate book? Can you walk us through a little bit more how you think about the real estate platform against that kind of backdrop?

[Jonathan Gray, President & COO]

I'd say a couple of things. Michael and Steve touched on it. Clearly, this retail and insurance push are in very early days. If you dimensionalize it you'd say in our traditional institutional world, those are $50 trillion call to capital, where the pension funds and sovereign wealth funds allocate 25%-plus to alternatives. In retail and insurance, those are $50 trillion in the case of retail, $30 trillion in the case of insurance pool to the capital that have low single digit allocations to alternatives. That creates a lot of wide space. Now the nature of the products, because of regulatory capital requirements, because of maybe yield requirements and liquidity requirements from retail investors may have to be a little different. But the basic idea that people want high-quality investment management at reasonable prices we think that what's worked in the institutional world can work in these two other worlds and we're seeing it in real time.

Michael mentioned BREIT. The private REIT market did not necessarily attract the highest-quality managers and people were charging off a lot, we've moved into that space with a really high-quality product and the markets responded. And so we see this as areas of tremendous growth that are also synergistic to what we do across the firm because we get more information, more deal flow, it's very beneficial. So those are big. I would also say, generally, over time, little more emphasis on growth, which means more exposure to Asia. You've seen we're raising - we just completing raising our second Asia fund, in real estate. We're raising our first Asia fund in private equity. I think Asia, given its growth significantly higher than Europe and the U.S., we like more exposure, our investors would like more exposure there. And then related to growth, of course, technology, life sciences, those are areas where we're doing investing today in Tactical Opportunities and in private equity. But over time, there could be opportunities to raise dedicated funds there. So I think as a firm, we've done a fair amount, we've done well. I think we can raise more dedicated capital.

So there is no shortage of areas to grow. The key thing, of course, and related to Steve's comments are the virtuous cycle requires that we deliver great returns. So whichever area we go into, we have to make sure that we have the right team, the right process, we feel like the market, it's the right time to enter that market and we can deliver returns. And then once we do, as you've seen, with us putting up very low capital, we can grow quite a bit. And so I think there's a lot of room over time. I know there's always been a concern of Blackstone is so big, are you near some sort of ceiling and people continually be surprised. Steve pushes us, says core+ could be $100 billion, some folks laughed, and Steve of course, be the last person laughing here. Because he has seen the power of the franchise and what we can do as long as we deliver for investors. So that's one. On rates, yes, rates rising have - can have an adverse impact on pretty much all assets, certainly, fixed income, on real estate, on corporate.

The question is in that kind of environment what do you want to own because not everything goes down in a rising rate environment. The things that do well, of course, floating rate assets on the fixed income side, which we've done a lot of in GSO, in our real estate debt business. And on the corporate and real estate side, its assets that grow faster. And so to do that, you need to either buy assets or you're intervening in a big way as we've been doing on the private equity side with some of these corporate carve-outs or in sectors where we have real faith in the growth. And that has been global logistics for us as an example, in real estate, where push online has led to much faster growth. And as Michael pointed out in his comments, the big holdings in real estate for us are definitely more growth oriented, Indian office buildings, life science buildings, single-family housing in the U.S. and in Spain. We've tried to prepare for what we think is coming, which is an environment of higher rates. You can't hide completely, obviously. But I think, as a firm, we've oriented our portfolio that way. We talked about BREIT, that portfolio is almost 50% in logistics versus 8% for the public REIT index. It got almost no retail versus 20% for the public REIT index. So as you think about investing, you don't just buy the market when you're us, you buy teams you truly believe in, you buy assets where you can intervene. And that's how you see the kind of outperformance we delivered in this quarter.

[Operator]

Your next question will come from the line of Patrick Davitt, Autonomous.

[Patrick Davitt, Autonomous Research]

Could you flush out the negative distress mark a little bit more, any idiosyncratic marks there, any real credit stress in the portfolio or really just a reflection of the high-yield index? And within that theme, are you - in terms of deals being done away from you, are you seeing any kind of increase in risky lending occurring, and I guess, what people broadly call the shadow lending sector?

[Michael Chae, CFO & Senior MD]

Patrick, its Michael. I'll take the first, maybe Jon will take the second. On the distressed, which I would call flattish to slightly down, which is probably a bit - actually better than the high yield index, really idiosyncratic, and sort of a name specific basis for the performance, which was generally pretty good. So that's - no particular trend there. That portfolio has a fair amount of energy in it, but the energy names basically weren't detractors or additive. They performed about the same.

[Hamilton James, Executive Vice Chairman]

Yes, and I would say on the leverage side, we haven't seen markets move to a place that make you really nervous. High-yield spreads have been tightening. Leverage levels on private equity deals have been moving up. But overall, when you look at the banking system and the discipline out there, we're not seen excesses. And so I think that's a healthy sign. If you wanted to say what could cause you to be nervous? When you start to see excesses in the banking system and financing that's a sign of caution. We don't see that out there today. But we are seeing leverage slowly creep up and we're watching that.

[Jonathan Gray, President & COO]

And Tony makes a good point, which is, the strength of the economy is helping to offset things. If you just look at the growth, we talked about it, but we had in our private equity portfolio, probably our strongest quarter in the last 3 or 4 years in terms of EBITDA growth for our companies, and obviously, that's very helpful in the leverage context.

[Operator]

Your next question will be from the line of Mike Cyprys, Morgan Stanley.

[Michael Cyprys, Morgan Stanley]

I was just hoping you could talk a little bit about the insurance business initiatives. You've mentioned that insurance investors don't have much in the way of alternative allocations today. But you also mentioned that there are some differences with this investor base in the way of regulatory and liquidity requirements. So could you talk about the types of solutions that you can offer, how you're tailoring these products versus insurance investor base, what you're doing differently than peers in this space? And just lastly, if you can comment on the risk analytics offering for alternative credit products. It seems like a new direction for Blackstone just in terms of offering technology solutions? Sorry, for the long question.

[Jonathan Gray, President & COO]

Okay. On the products, I think, insurers just as backdrop, their challenge is, traditionally they bought government bonds and corporate bonds, which delivered adequate return for them. And of course, in a very low-interest rate environment that doesn't work. Also, their liabilities have been going up because of longevity. So they're looking for higher returns. What can they do? They can do more even under their constrained regulatory capital requirements. They can do more of our traditional alternative products. So that's stop number one. Number two are more structured products that may have the appropriate ratings that meet their NAIC requirements, but generate higher returns on average. And that can be in areas like CLOs, it can be in nonconforming mortgages, on the resi side, it can be in commercial mortgage debt.

There's a whole universe of things that we touch. If I can just give you a simple example, in the commercial real estate space, we often will make mortgages, sell off the A loan, hold on to a B piece. For the folks who owned that A loan that's a very attractive piece of paper and gets good capital treatment. So there's opportunity inside of our firm given activities we're already conducting to generate favorable risk-adjusted returns for them. But I do think to this product because there's so much demand from the underlying insurers, the key thing we'll be able to deliver to them these things that work in a regulatory framework for them. I think that's really the key. And again, that's why, I think, Blackstone is so well positioned. Because of the breadth of our platform, because we're in credit and private equity and real estate, in debt and equity, we're pretty uniquely set up. I think it's harder for other forms to deliver what we can.

[Michael Cyprys, Morgan Stanley]

Just on the technology offering on the analytics side for insurance?

[Michael Chae, CFO & Senior MD]

Yes, Michael, we're not planning near term having an external technology offering. We're proud of the technology we developed. Often we - and other times we have spun some of that as third-party capable, but there's nothing near term on that at this point.

[Operator]

Your next question will come from the line of Rob Lee, KBW.

[Robert Lee, KBW]

I'm just curious, I mean, there's obviously a lot of - you have a lot of new business initiatives taking place as you pointed out for a while now. And I'm just curious, given it seems like there's so many opportunities ahead of you, I'm more curious about where you don't think there's any alternative space, where are places you're not that interested. I mean, obviously, doing side things like investment-grade credit or liquid listed equities. Where in the alternative space, you think, geez, it's just not a market we're interested in, would it be venture capital or something, just trying to get a feel for where you think is just - and why you think that wouldn't be something you'd be interested in?

[Stephen Schwarzman, Founder, Chairman & CEO]

I think for us it's really a scale question. If there are markets, we look at some emerging market areas where we just can't deploy capital and scale, that doesn't work. Some of the true VC stuff, may be, again, harder for us. As part of larger platforms, there may be an opportunity. In general, we look at most of the alternative space as attractive to us. So we'll get to it over time. I think the question we often get is, do we want to go into, let's say, long only listed equities. And the answer is generally no, maybe there are some exceptions in very targeted areas. But we look at alternatives broadly globally, still see a lot of runway. But the short answer to your question, really where we can't get the scale to where we wouldn't go.

[Operator]

Your next question will come from the line of Ken Worthington, JPMorgan.

[Kenneth Worthington, JPMorgan Chase & Co.]

Just maybe a follow-up on Franklin Square. In your comments to replace the direct lending business, you mentioned both institutional and retail products here. Is the likely path likely be more retail or institutionally focused? And on the retail side, does the SEC's fiduciary rules outlined by the SEC sort of impact your ability to or maybe how you reach retail here? And then maybe lastly, based on your conversations with the various investors, how does the fundraising environment look for direct lending right now?

[Joan Solotar]

Hey, Ken, it's Joan. So we will start institutionally and in retail initially with the big wirehouse platform. This will ultimately be much more retail-oriented product. I think that's where most of the eventual growth will come. In terms of demand and DOL and all the other changes, I think, similar to how we thought about constructing BREIT is how we're giving a lot of thought to our product. And I think we think about pricing net returns to the investor, how we deliver it, service all of that will be delivered with the same excellence as we do everything else year. So we are very optimistic that we're going to be able to replace that capital over the next few years.

[Kenneth Worthington, JPMorgan Chase & Co.]

Okay. Fair enough. And then just maybe to follow on Craig's question earlier. On the repurchase authorization, you tripled it, the $1 billion is sort of the splashy number, but the message around it seems kind of water down with the primary use to really just offset dilution, which seemed pretty limited anyway. So just when was the last time you actually used the authorization - not the authorization, when is the last time you actually used it to buy stock and was it ever in the open market? And what ultimately is the message we should take away here, again, it feels part splashy, part boring, but what really should we think here?

[Michael Chae, CFO & Senior MD]

Ken, I'll start, it's Michael. And it's the first time we have been accused of splashiness, but we will take that as an example. Look, first of all, the $1 billion, your splashy number, that is about 5% of our pre-flow, public flow, which I think is, in line with sort of median sizing for companies programs. We think it's a sensible number. As I mentioned, we've always been fairly disciplined on managing organic dilution. And we want to be more aggressive here. Putting - neutralizing organic dilution as a parameter around this program, we think, makes sense to put sort of scale and structure and also allow us to execute with some consistency programmatically over time and not just sort of fire and forget as it sometimes the case. You asked about history. We utilized about 20%-or-so of that original authorization, 25% quite early on, and it was generally not open market purchases. So I would view this, while we inherit legacy program, it's really a de novo program with the distinctive kind of new approach. And we think it makes sense and it's the step we want to take. And ultimately, what we're thinking all the time about how to start shareholder value, we're in a position now with our balance sheet having growing steadily stronger and giving us more and more flexibility, our free flow has steadily expanded to point where we can do these things without impairing liquidity in the stock. So we're in a great position and we're constantly thinking about how to do things to sort of value over the long term.

[Stephen Schwarzman, Founder, Chairman & CEO]

I just would add to Michael's comments. This group, this cable, in particular, but across the firm's, highly shareholder focused, the employees own 50% of the company, we do pay out 85% of our distributable earnings, this is going to be incremental to that. And we're constantly thinking about what's the way to maximize value for this company and trying to get the market to recognize the quality of the business we operate.

[Operator]

Your next question will come from the line of Glenn Schorr, Evercore.

[Glenn Schorr, Evercore ISI]

Just one quick follow-up. So you mentioned the net accrued carry in three years, obviously, this quarter had a little volatility in it. Just curious, I'm not sure if anything got postponed, delayed in the volatility backdrop, but maybe thoughts on what the near-term and more intermediate pipeline might look like for exits?

[Michael Chae, CFO & Senior MD]

Sure, Glenn. Look, I think, as we said at the beginning of the year, 2017 was always going to be a tough act to follow. It's also early in the year from a visibility standpoint. And as always, these things are market dependent. Having said that, the performance receivable growth point is, as you know, an important one, and not only did it grow 9% year-over-year, we grew 8% just in the quarter. So as you know that's the nature of our business model that a quarter where you see less exiting is a quarter where you often also see even more growth in terms of value in the ground. Another way of thinking about it is our unrealized fair market value of our investments, our dry down investments is actually up 16% in the last 12 months. So even during the time we sold a tremendous amount, our position has gotten meaningfully stronger, which is a great place to be. So we're obviously active in looking at X opportunities in the real estate area. We have a number of things in - both in Europe and U.S. under contract. So we're - it's our constant process of refilling the cupboard and we feel really good about our position over the long term.

[Operator]

The next question will come from the line of Devin Ryan, JMP.

[Devin Ryan, JMP Securities]

In Private Wealth Solutions, you touched on direct lending. Can you talk about any other kind of newer initiatives that could be coming? And then obviously the education process, just trying to think about that as you're rolling out newer products into what seemed to be an increasingly kind of wide distribution network, and obviously, the industry is pretty fragmented as you get beyond kind of the wirehouses, just trying to think about how you do that as you continue to grow and add new products as well?

[Joan Solotar]

Sure. So I think the best way to think about it is that the growth is going to come from further penetration of the channels that we are already in and that's a huge opportunity. Second that we're expanding into other channels like independent broker-dealer and RIA. And then third, which is new product. On each of those, there's a big pull based on the comments that were made earlier, which is essentially $0.97 of every dollar is still in daily liquidity product at a time when you have longevity issues, need for yield and return and you have a lot of advisers who historically just haven't been well educated enough in the alternative spectrum to feel confident putting it in the portfolios, even though their firms are recommending that. So we started with Blackstone University. We've had about 3500 advisors go through that. But we're really doing lot more in terms of pushing things out digitally.

We're having regional roadshows. We're really trying to address hundreds of thousands of advisors, rather than the small number. So we have initiatives in all of those areas, I think, you'll continue to see new products rolling out. We have one additional separate from the BDC, a credit product that's a floating rate. Really, what are we trying to address? We want uncorrelated returns, we want to be able to protect against rising interest rates and inflation. And we want to increase the overall returns of their portfolios. And I think this last quarter, as was mentioned earlier, really highlighted that in a period of volatility, that is what we can provide the value propositions there and so there's a lot more pull. And we are the only firm really with excellence and returns across every alternative area. So it's not just individual product we can weave together in higher solutions.

[Operator]

Your next question will come from the line of Mike Carrier, Bank of America Merrill Lynch.

[Michael Carrier, Bank of America Merrill Lynch]

Just a quick one, Jon. I think on the other call you mentioned some of the - like whether its strategic initiatives or growth outlook, and - one was maximizing your shareholder value. Given what you guys laid out, I think, you got the growth, your outlook kind of nailed down. But when we think about either the growth in FRE, which recently has been very strong, but even like the consistency of the distribution or even expanding the ownership base, like where may be incrementally you're going to be more focused over the next few years given that what has already been kind of put in place?

[Jonathan Gray, President & COO]

Yes, I think for us, the challenge with public markets is they tend to be pretty short term focused. And so one quarter markets are off and we may not sell as much and our results are lumpier than other companies. But if you look at our company over a longer period of time, the earnings power of the company and the AUM growth are unmistakable. And so for us, continuing to grow the business, which, as we talked about in that virtuous cycle, do a great job for investors, they give you more capital. When that occurs, that should lead to this growing fee - fee earning stream. And then performance fees, you should have a larger and larger base. I would say, continuing to execute against that strategy and showing market participants the power of this model, the idea that we have 50-plus percent margins, we utilize very little to no capital, we're in the terrific space. That we're going to continue to execute that way. Now around your question, specifically, are there things we can do to maximize value this quarter? We've got a couple, we've got a special dividend. We announced a buyback related to keeping our share count constant. We're constantly evaluating what's the right thing to do. We are a very shareholder-friendly company. We want to maximize value. But we have enormous confidence in the base business. I don't know many businesses in the world that can grow the way we do with so little capital. And the prospects, the sector therein has such a favorable outlook. So I know that doesn't answer what is next quarter or the following quarter. But just like this company has over 30 years, the last 10 years, five years, I think, the same story plays out. And I think market participants will begin to recognize this and appreciate us.

[Stephen Schwarzman, Founder, Chairman & CEO]

Mike, let me just jump in too, what's not appreciated by the market is these permanent capital vehicles not only lock up your capital and scale to higher FRE margins, but they drive steadier carrier realizations. Because a bunch of them are going to be done episodically by investor on marks, out-forcing us to sell the asset. So it will have a smoothing effect, which, I think, will please the market, make it a higher multiple revenue stream.

[Operator]

Our final question will come from the line of Brian Bedell of Deutsche Bank.

[Brian Bedell, Deutsche Bank AG]

If I can just move to the infrastructure topic and the fundraising pace there I know you did, that's starting up a little bit more aggressively the second quarter. Maybe Jon, if you can talk about how you're viewing the pace of that fundraising over the next couple of years, whether you think you'll have the internal $20 billion target within the next three years and then what kind of opportunities are you seeing in that and what areas are looking a little bit more challenging?

[Jonathan Gray, President & COO]

So the $20 billion, just to clarify, is a long long-term commitment from our lead investor. And that sort of sits on the shelf. And as we raise third-party capital and deploy it, we can call it down. We don't have any internal target for when we'll raise the outside money or how we'll deploy it over time. Will we deploy it, if that's the question, yes. We're pretty confident that in the fullness of time, we're going to raise matching funds and build a very large business. But there's no set time limit. And a lot of this is going to relate to the opportunity set and the deal flow. The good news out-of-the-box is, when you look across regular way infrastructure, when you look at midstream needs, utility needs, there's a lot of capital needed in these areas, and that gives us a lot of confidence about the scale this business can grow to. But we have not set a specific time limit or target. The nature of this commitment is very helpful for us. Because we're building again another long-term permanent capital vehicle, adding on to what Tony said. This is set up in a way, where once the funds go in, we'll have them for the long-term, which is the right way to own infrastructure assets. So this should grow to be very large, it should grow to be a permanent part of Blackstone. We're going to do it like everything we do in the right way. And the market and the opportunity set will determine how fast it happens.

[Brian Bedell, Deutsche Bank AG]

Right, so you'd be very disciplined in deployment as you look at that?

[Jonathan Gray, President & COO]

For sure. Disciple in deployment, but when big opportunities - what makes this fund, I think, particularly interesting is there's a shortage of large pools of capital that can do really big things at reasonable return levels. And we think that's an interesting part of the market. So we're hopeful big opportunities will come along. But as you said, we'll be disciplined.

[Brian Bedell, Deutsche Bank AG]

Okay. Great. And then maybe just a follow-up, the C4 question, any updated thoughts on what you guys are thinking about that if KKR decides to move, I guess, they'll be the closest one to move in that direction if they decide to do so, how would that impact your view of whether - and to what extent you think in the shareholder friendly types of actions that you might be able to take going forward? How are you viewing that as a potential arrow in a quiver so to speak?

[Michael Chae, CFO & Senior MD]

Hey, Brian, it's Michael. What I'll just say is that I think that our posture is consistent with what we talked about last quarter. We're monitoring carefully all aspects of the issue. We're not in a hurry. This is a race that does not necessarily go to the swift and one shot making a thoughtful decision. So what some - what others of our peers do, if they do anything, we'll obviously observe and see what the learnings are and continue to look at this. And as we talked about and as maybe we demonstrated this quarter, we are open-minded about taking actions that we think are good over the long term for shareholders. But we want to be very careful about it.

[Operator]

And at this time, I'm showing no further questions in queue. I would like to turn the conference back over to Mr. Weston Tucker for any closing remarks.

[Weston Tucker]

Okay. Thanks, everyone, for joining us today. And please reach out to me with any questions.

[Operator]

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.